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Why a clean cap table makes your startup more investable


Patricia Borlovan

· 3 min read
Why a clean cap table makes your startup more investable
Discover why a clean cap table makes your startup more investable and learn practical strategies to achieve it from our recent webinar.

We’ve recently hosted a webinar with Eric Bartha, SeedBlink’s Head of Revenue, and Bogdan Stoian, Professional Services Lead, where they explained how a well-managed cap table safeguards your ownership and simplifies your growth and fundraising journey.

A clean cap table clearly shows how founders allocate ownership, eliminating misunderstandings and legal complications. Investors assess the equity health and future potential of the company. A clean cap table also helps simplify due diligence processes, making it easier for companies to secure funding rounds without unnecessary delays or disputes. The need for a clean cap table is evident.

  • Investors’ perspectives on cap tables – best practices and pitfalls
  • Effective strategies for managing a growing shareholder list
  • Tips to prevent significant ownership dilution in early funding rounds
  • The effects of different funding instruments or amounts on your ownership and how to strategically allocate equity based on your startup's stage.

Before we dive into the takeaways from this webinar, let's unpack some basic things about cap tables.

Overview of cap table management

We want to have a quick look first at the structure of a cap table:

General Information:

  • Nominal Value (or Par Value): This value is extracted from your company's founding documents. While typically a small, arbitrary amount, is used to ensure that the company maintains a certain level of capital.
  • Common (or Ordinary) Shares: These shares grant holders dividends and voting rights, serving as a fundamental form of ownership in the company.
  • Preferred Shares: Preferred shares carry a fixed dividend and are often issued to raise capital while offering certain privileges over common shares.
  • Convertible Shares: This type of security can be converted into common shares, allowing for flexibility in equity ownership structure.

There may be also other types of shares, like non-voting, of different classes, and so on.

Shareholder Information:

  • Shareholder Name: The names of your company's shareholders, including any share pools like an Employee Stock Ownership Plan (ESOP).
  • Number of Shares / Shareholder: Each shareholder's shares are inputted here. The template you use calculates share value based on the number of shares and share price.
  • Type of Share: Designates the type of shares each shareholder holds, Common, Preferred, Convertible, or other categories.

Calculated Information:

  • Total Number of Shares: It represents the cumulative count of shares held by all current shareholders.
  • Shareholding Percentage: The ownership percentage for each shareholder calculated by dividing their shares by the total issued shares.
  • Shares Value per Shareholder: The value of shares for each shareholder obtained by multiplying their number of shares by the nominal or current share price.
  • Total Company Value: The overall value of your company based on the nominal share price (for initial cap tables) or the current share price multiplied by the total number of shares.

Important note! Always make sure that the math behind the cap table is correct. A mistake startups make at their first investment at pre-seed, post-MVP, or MVP level can result in major legal problems and fees paid later on.

Solution: To manage a cap table more easily and effectively, we recommend using a user-friendly platform that can handle the complexities of equity distribution and updates. Platforms like SeedBlink help you avoid errors associated with manual management methods, such as spreadsheets.

As a founder, you get real-time updates and can offer easy access for your stakeholders, ensuring everyone is on the same page. A platform reduces the risk of mistakes and improves operational efficiency, enabling companies to focus on growth rather than administrative tasks.

Equally important is updating the cap table and reporting changes to the relevant trade registries across jurisdictions. By doing so, founders ensure that all stakeholders, including employees with stock options, are clear about their shares and potential future equity.

Investors evaluate cap tables meticulously to understand the company's ownership structure and potential future liabilities. A clean, well-maintained cap table indicates a well-managed company, which is more attractive to investors.

Investors often look for a balance of power among shareholders, a clear delineation of voting rights versus economic rights, and the presence of any potential red flags, such as large equity stakes held by inactive or former employees. Investors prefer cap tables with fewer complications, facilitating quicker decision-making processes and reducing the risk of corporate governance bottlenecks.

"A red flag that typically investors don't like to see is a large chunk of the company being owned by someone who is no longer with the firm, who left for whatever reason."

Founders' equity split

How should founders split equity in a startup?

This is a challenging question that doesn’t have an answer by the book. What is right for your scenario might not be for others, and splitting 50/50 is not always the best solution.

An important step in the beginning is to split your equity so that it doesn’t create conflicts over time.

This should be an open-hearted decision between founders when you decide to create the company. Figure out how you want to split the pie so that it allows you to build and keep a long-standing relationship.”

However, if there is one piece of advice we wanted to give you as a starting point from our discussion with Eric and Bogdan, it is this one. Base your decision on the division of power dynamics and experience to prevent conflicts down the road. This approach ensures that each founder's contribution and decision-making power are reflected in their equity stake.

“If Bogdan and I, you know, start a company and he has, you know, 10 years of experience in a certain domain, and then we open up a company in that certain domain, maybe it would be good to reflect it in such a way that Bogdan has a majority stake over myself."​​

Why implement a stock option plan early on?

Employee stock option plans allow employees to become shareholders, aligning their interests with the company's success. This motivates employees to work towards the company's growth and helps attract top talent who might prefer the potential upside of equity over immediate higher salaries.

When to implement an ESOP?

The answer is the sooner, the better.

When setting up an ESOP, you allocate a good percentage of the company's equity to be distributed over time to key employees without significantly diluting the founders' stakes. This should be reflected in your cap table.

Typically, startups allocate between 8% and 20% of their equity for ESOPs, depending on the jurisdiction and the company’s growth stage​​. Keeping a healthy percentage of equity allocated will help you manage dilution, maintain a healthy equity structure, and have control over your company as a founder.

How to manage a growing list of shareholders in a startup?

If you don’t want too many complicated situations later on, start your journey as simple and clear as possible from the beginning. To build the base for this, you need to document the ownership structure, including equity stakes, voting rights, and convertible notes, and update it every time there is a change.

Early on, startups should anticipate shareholder growth by implementing structures that facilitate efficient management. One effective method is to use a nominee structure or create a special purpose vehicle (SPV) to aggregate smaller shareholders. Instead of having numerous individual shareholders, the company can manage a single entity representing these stakeholders, simplifying communication and decision-making processes.

We’ve seen founders struggle and face many difficult situations when their cap tables become complicated. This is why we are raising these issues today, to avoid unnecessary problems tomorrow.”

Another crucial aspect is ensuring transparency and clear communication with all shareholders. Founders should regularly update shareholders on the company's performance, strategic decisions, and any changes in the cap table. This transparency builds trust and helps preempt potential conflicts.

Additionally, setting clear expectations about the role and rights of shareholders from the outset can prevent misunderstandings.

"Managing your cap table will need to create a full circle when it comes to actually managing all the people that are involved within the important decision and the importance of taking the next steps for your business."

Cap table best practices

Calculate dilution after a new fundraising round.

To accurately calculate dilution in a cap table after a new investment round, founders must consider various factors such as convertibles, ESOP plans, and other equity instruments.

First, consider the conversion of any convertible notes or SAFEs into equity, as these will impact the total number of shares and the ownership percentages. Next, factor in the exercise of stock options from the ESOP, which typically dilutes existing shareholders.

Avoid over-dilution and under-dilution.

Start by setting realistic valuation expectations that reflect the company’s current stage and growth prospects. Avoid raising too much capital early, which can lead to excessive dilution.

Conversely, underfunding can result in a lack of resources to achieve critical milestones, potentially necessitating unfavorable future financing terms.

Use simulations in fundraising rounds.

Creating different scenarios allows you to visualize how various funding amounts, valuations, and equity allocations affect the cap table. Simulations provide clarity, allowing you to align your round with the company's strategic objectives.

"The simulations also help you actually to look at multiple setups... So, creating these scenarios from scratch will help you, as a founder, understand exactly how this will impact the company."

Here’s an example of a simulation using convertibles - see how the ownership percentage changes depending on the conversion options:

A clean cap table. Source: SeedBlink Equity

A cap table with convertibles included. Terms: 10M valuation cap / 20% discount. Source: SeedBlink Equity

Simulation of round at 30M valuation - 10M valuation cap is applied. Source: SeedBlink Equity

Simulation of round at 8M valuation - 20% discount is applied. Source: SeedBlink Equity

Use a Nominee structure to clean up the cap table.

After an investment round, use a Nominee structure to clean up the cap table by aggregating smaller shareholders into one entity through syndication. It will simplify the management of shareholder communications and voting processes, reducing administrative burden.

The nominee structure will be within your cap table as the shareholder and will be the legal owner of the shares, but the investors aggregated within the pocket of the nominated structure will be the legal beneficiaries."​​

Create a syndicate for employees to invest in your company.

A syndicate for employees can help them invest in the company and facilitate their access to equity without complicating the cap table. By pooling employee investments into a single entity, the company can manage fewer entries on the cap table, maintaining simplicity and clarity.

"_If they would like to invest, I suggest creating a syndicate within your company that will aggregate all the employees that want to invest"_​​.

Founders should understand that mistakes in early calculations can lead to significant legal and financial consequences later. Legal mistakes in cap tables can be particularly challenging and expensive to fix, especially during the due diligence process.

Investors and their legal teams will examine your company’s cap table to ensure all equity transactions have been accurately recorded. Errors discovered at this stage can delay funding rounds and incur substantial legal fees.

"What lawyers of investors are usually looking at, percentages and shares, and those need to be correctly calculated... mistakes are done in the past that need to be corrected"​​.

To avoid this type of mistake, we recommend you seek help from professional legal and financial advisors to review cap table transactions and use a dedicated cap table management platform that guides you in this process.

For more insights, watch the whole SeedBlink webinar on Why a clean cap table makes your startup more investable:

Explore the benefits of cap table management software

Cap table management software enhances accuracy and transparency. It also helps you become more credible and attractive to investors.

Discover SeedBlink’s equity and cap table management solution.

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